What is the S&P 500?
The Standard and Poor's 500, or S&P 500, is one of the world’s most widely followed stock market indices. Tracking the performance of shares in 500 leading publicly traded US companies it is widely regarded as the best gauge of the US share market.
The index is chiefly weighted according to company size, which means broadly that the largest companies are also the largest parts of the index – and therefore the biggest influences on performance. It is not a precise list of the top 500 US companies by size because weightings are adjusted by the number of shares available for public trading. The current top ten constituents and their approximate weightings are as follows:
Company | Weighting |
Apple | 7.2% |
Microsoft | 6.5% |
NVIDIA | 6.1% |
Alphabet | 3.6% |
Amazon | 3.5% |
Meta Platforms | 2.6% |
Berkshire Hathaway | 1.7% |
Broadcom | 1.6% |
Tesla | 1.5% |
Eli Lily | 1.4% |
With 500 companies represented this is a broad index, in contrast to the much narrower Dow Jones Industrial Average which comprises only 30 prominent companies. Unusually, the Dow is a price-weighted index, meaning its value is derived from the price per share for each stock. The S&P is more biased towards the big technology and ecommerce companies, so investors in this index tend to be more reliant on their performance.
Should I invest in the S&P 500 now?
Legendary investor Warren Buffett has famously advocated funds that track the S&P 500. He believes most ordinary investors would be better off buying index funds because of the dangers involved in picking individual stocks. However, investors should also be aware of the level of concentration in the largest stocks in the index.
Over the past decade, returns from the S&P have been strong, driven by the growth of a narrow band of stocks, the so-called ‘magnificent seven’ (Apple, Microsoft, Nvidia, Tesla, Alphabet, Amazon and Meta). As a result, they have become very large weights in the US and global tracker funds, which are very popular with investors for their simplicity and typically low cost.
For instance, a typical US tracker fund or ETF has around 30% in these seven stocks alone. Passive investors must hope the Magnificent Seven stay magnificent, otherwise a big dent to returns could be coming their way. These stocks are widely seen as offering growth in a low growth world, and most of them could stand to benefit from advances in AI, a compelling narrative that has captured investors’ imaginations. However, many active fund managers have concerns that valuations are stretched.
How to invest into S&P 500
You can't directly invest in the S&P 500 because it's an index, but you can invest in one of the many funds that aim to track its composition and performance. There are lots of fund choices but two main overall options: a unit trust or OEIC fund (Open Ended Investment Company) or an Exchange Traded Fund (ETF).
Unit trusts and OEICs are a common way of pooling investors’ money and investing it in specified assets. They are run by fund management companies and investors can deal units in them at a daily price. Meanwhile, ETFs are traded on a stock exchange, just like company shares. This means that they are constantly priced during market hours.
The most competitive OEICs and ETFs have comparably low annual ongoing charges. However, you do need to factor in any fees for share or fund dealing when buying and selling.
What is the best way to invest in the S&P 500?
- Fidelity Index US is an OEIC fund that aims to track the performance of the benchmark S&P 500 index before costs. The fund has highly competitive charges and is available in either income units (where income from the underlying holdings is paid out) or as accumulation units (where income is reinvested for you). It uses ‘full physical replication’ – a strategy that seeks to physically hold all or close to all the securities of the particular index, with the approximate weightings of that index.
- An ETF alternative is Vanguard S&P 500 UCITS ETF. Like the Fidelity fund this is a physically replicated product that holds the same stocks as the index and is very low cost. Due to the large size it tends to be very easily traded with only a small spread between buying and selling prices. Dividend income is distributed to investors on quarterly basis.
- If investors are unsure about a ‘big tech’ bias and current sector weights then using an equal weight strategy that places more emphasis on areas such as industrials, real estate, materials and utilities may be a consideration. Broadly, the approach tilts towards cheaper ‘value’ stocks and away from more expensive ‘growth’ stocks. X trackers S&P 500 Equal Weight UCITS ETF is one option. It tracks the same number of holdings as a standard S&P 500 ETF, but it weights the components equally – at approximately 0.2% presently – rather than by size based on relative market capitalisations. Holdings are rebalanced to equal weighting on a quarterly basis. However, annual charges are higher for this product than the cheapest standard S&P 500 ETFs with an Ongoing Charges Figure (OCF) of 0.2% compared to 0.07% for the above Vanguard ETF for instance.
Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment, please seek professional advice.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Things to know before investing in the S&P 500
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